Cloud Technology, Digital Assets and the Future of Accounting and Attestation

As technology continues to advance at a rapid pace, two significant developments, the adoption of cloud technology and the emergence of digital assets (with its underlying blockchain technology) are revolutionising the way financial data is stored, processed, and verified, presenting both challenges and opportunities for the accounting and auditing profession.

Cloud technology has become increasingly widespread in recent years, offering numerous benefits. By moving accounting systems and data to the cloud, businesses can enjoy improved accessibility, scalability, and cost-efficiency. Cloud-based accounting software allows real-time collaboration, enabling multiple users to access and update financial information simultaneously from different locations. This level of flexibility enhances productivity and streamlines the workflow, leading to faster and more accurate financial reporting. 

Furthermore, cloud technology can provide enhanced data security and disaster recovery capabilities. Cloud service providers typically have robust security measures in place, including encryption, firewalls, and regular data backups. This reduces the risk of data breaches and ensures the availability of financial records even in the event of hardware failures or natural disasters. Additionally, cloud-based accounting platforms often offer built-in compliance features, such as automatic updates to reflect changes in accounting regulations, facilitating adherence to legal and regulatory requirements. 

The widespread adoption of cloud technology, however, also presents certain challenges that must be addressed by the accounting and auditing profession. One of the primary concerns is assuring data integrity, security, and privacy. As financial data is stored on remote servers owned by third-party providers, there is a need for stringent security measures and protocols to protect sensitive information.  

Accountants must ensure that the cloud service they or their clients choose adheres to industry standards and employs robust encryption and authentication mechanisms. 

Another challenge lies in the management of cloud-based systems. Accountants need to possess the necessary skills and knowledge to navigate cloud platforms effectively, integrate them with existing accounting processes, and troubleshoot any technical issues that may arise. Continuous professional development and training programmes should be implemented to equip accountants with the expertise required to leverage the full potential of cloud technology, for use by their firms or to audit their clients’ financial statements. 

On the other hand, these same concerns present opportunities for audit firms to report on the design, implementation, and operating effectiveness of the cloud service’s controls in accordance with the relevant professional standards (i.e., under the AICPA SOC reporting framework or the International Accounting and Auditing Standards Board ISAE 342 framework). 

In addition to cloud technology, the rise of digital assets, including cryptocurrencies, is also reshaping the future of accounting and attestation. Cryptocurrencies, such as Bitcoin and Ethereum, have gained significant traction as alternative forms of digital currency. They operate on decentralised blockchain networks, offering transparency, security, and efficiency in financial transactions. As more businesses and individuals embrace cryptocurrencies, accountants and auditors must adapt to this evolving landscape. 

One of the key challenges in accounting for cryptocurrencies is their valuation and recognition. The volatile nature of cryptocurrency prices, and the 24-hour trading market, makes it difficult to establish a reliable basis for valuation. Management accountants need to develop standardized frameworks and guidelines for assessing the fair value of cryptocurrencies, taking into account market trends, trading volumes, and other relevant factors, and auditors must conclude on the appropriateness of the policies selected and the correctness of their application. Additionally, the treatment of cryptocurrencies in financial statements and tax filings must be clarified to ensure compliance with the evolving accounting standards, tax regulations, and regulatory requirements. 

For management of companies involved in the digital asset space, and their auditors, another critical concern is the ownership and security (control) over the holdings. Cryptocurrencies have unique control issues, as positions may be held by a custodian, by the company itself (the “cold wallet”) or by a trading platform (the “hot wallet”). Maintaining and testing the controls over custody and safekeeping may be difficult and complex, especially since many custodians or platforms do not engage an accountant to perform the control examinations referenced above. 

The emergence of cryptocurrencies brings about the need for enhanced attestation services, and, in the case of auditors, the skills needed to audit clients engaged in the digital asset arena, whether as traders or commercial enterprises accepting and holding cryptocurrencies as payments for products sold or services rendered.  

Blockchain technology, which underlies most cryptocurrencies, enables the creation of tamper-proof and immutable records of transactions. This presents opportunities for accountants to provide attestation services, such as auditing smart contracts and cryptocurrency transactions for accuracy and compliance. The transparency and auditability offered by blockchain technology can enhance trust and confidence in the financial ecosystem. However, there are also risks to accounting firms engaged in this space. For example, recent events in the digital asset exchange ecosystem have led to the discussion of accountants performing “Proof of Reserve” engagements. There is significant doubt, however, as to whether these reports actually provide any assurance as to ownership or control over the digital assets by the client or customer. Additionally, a significant accounting firm in this sector recently announced that it is halting its practice and would cease issuing the proof of reserve reports.

Accounting and auditing firms may also offer nonattest, advisory services to help companies navigate the complex regulatory landscape surrounding digital assets, providing insights into evolving regulations and assisting in implementing compliant processes and reporting frameworks. The firm can also offer security and compliance advisory services, assessing the effectiveness of security measures, and evaluating compliance with industry-specific regulations and best practices. By conducting these engagements, the firm helps companies identify vulnerabilities, strengthen security protocols, and maintain regulatory compliance. 

By staying up to date with regulatory developments, the firm can help companies manage risks associated with legal and regulatory compliance. 

The complex nature of blockchain technology and the lack of established auditing standards pose challenges to the attestation process. Accountants need to develop expertise in understanding blockchain protocols, conducting blockchain audits, and assessing the risks associated with digital assets. Collaboration between accounting professionals, regulatory bodies, and technology experts is crucial to establishing a robust framework for attesting the accuracy and reliability of cryptocurrency-related financial information. 

Rapidly changing technologies, including the adoption of cloud technology and the emergence of digital assets and its enabling blockchain technology, are shaping the future of accounting and attestation skill sets and services. The cloud offers enhanced accessibility, scalability, and security for financial data, but accountants must address concerns related to data integrity, security, and privacy. Cryptocurrencies present opportunities for innovation in valuation, recognition, and attestation, but accountants must grapple with the challenges of volatility, controls over custody, and evolving regulatory landscapes.  

By embracing these technological advancements and developing the necessary skills and knowledge to respond to these challenges and opportunities, accountants can position themselves as trusted advisors in the digital age of finance.